The Rewards and Penalties of Loyalty

E-commerce companies are scrambling to find ways to keep their customers loyal. With multiple players in each category offering the same products and services, a mad dash has ensued for points, million-dollar prize contests and frequent-flier mile programs.

With little information and research on their customers, many e-commerce companies have jumped into aggressive programs that are too expensive to see a return on investment anytime soon or are not appealing to consumers. It is important to weigh the costs and benefits before committing your company to a loyalty program.

At, we looked at our customer segments and loyalty options and decided there was not enough information in such a nascent business to launch a long-term loyalty points program. We created a short-term test program that launched in August. We found several pros and cons of doing a loyalty program.

Why do a loyalty program? Loyalty programs can support a company’s value proposition. Customers who connect with the longer-term value that a company provides (and not just with the reward incentives) typically are more loyal to your brand. The revenues and market share can grow, as your best customers are motivated to repeat sales and refer other customers to you.

With so many companies per category, companies also can pre-empt a competitor with a unique loyalty program. In some cases, companies are forced to do a loyalty program to match a competitor. Those that face a competitor with an established incentive program may risk losing their market share. A thought-out loyalty program could tip the scales in your favor while maximizing bottom-line benefits.

Loyalty programs give you a chance to increase the value of your less-valuable customers. If your customer segmenting is done properly, you can slightly increase the average purchase with your light users and see a huge effect on the bottom line.

The risks. One big challenge of establishing a loyalty program is that the industry lacks empirical data to assess the success of existing ones, online and offline. Even more challenging, young online companies provide little historical data to even segment their customer databases and set a goal. It is important to know who your loyal customers are in order to target products and services to them.

Another consideration is the risk of rewarding loyalty to the program instead of to your brand. Savvy customers are a click away from defecting to competitors that offer similar programs with better rewards. Also, programs can reward the wrong customers, especially when providing benefits to those who would have made a purchase anyway.

Loyalty programs are also difficult to end. A clearly defined end date must be stated at the beginning of the program. Even then, companies that end loyalty programs still will have disgruntled customers.

Creating the program. We created a short-term test and factored in several dimensions:

• Value. Customers must perceive the value of the prize, reward or offer. Customers will not add an extra product or come back more often for a key chain.

• Choice. There need to be options for point redemption. Offer customers different tiers of prizes.

• Aspirational value. Have a high-value reward for customers to work toward.

• Relevance. Make sure the reward is something your customers want. It should be relevant to your business. If you are unsure, ask; conduct focus groups with the segments of users in your customer base.

• Convenience. It should be easy for customers to understand and redeem their points. Skip the crazy math. In the case of, $1 = 1 point.

• Communication. The program should be clearly communicated to your customers in a compelling way. At the launch of the loyalty program, we sent an HTML “promo alert” that not only informed the customers, but drove additional traffic to the store for inquiries.

With some loyalty points programs costing more than .04 cents per point, they may be easy to overlook — but don’t rule them out. If your return-on-investment analysis and customer segmenting are done carefully before implementing points-based loyalty programs, you may find them invaluable for driving repeat visitor traffic and building your brand.

• Susan Daniher is vice president of marketing at, Hollywood, CA, an entertainment retailer. Reach her at [email protected]

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